Everyone knows you can complete a 1031 exchange of business use or investment “real” property but most don’t realize you can also exchange business use or investment “personal” property. Exchanges involving tangible and intangible personal property assets such as equipment, aircraft, gold, paintings, livestock, radio or television station assets and/or broadcast rights, delivery routes, franchises, furniture and fixtures, mineral, gas or timber rights. The list goes on and on.
An exchange involving personal property provides the same tax benefits as does a real property exchange and the same requirements must be satisfied. Where they differ from real property exchanges is in the definition of “like-kind” property. When we deal with real property exchanges, such as duplexes, office buildings, apartment complexes, raw land and shopping centers, the term like-kind simply refers to real property. The term like-kind is very broad and liberal and refers to the character of the property. Therefore, any type of real property can be exchanged for any other type of real property provided it will be used for business use or investment. A taxpayer can exchange non-income producing raw land and acquire a duplex and a storage facility. However, when dealing with personal property exchanges, the term like-kind is very specific and the replacement property must be within the same asset class, have the same Standard Industrial Classification (SIC) code or be a specific match. Therefore, if a taxpayer is exchanging restaurant equipment, silver bullion can not be acquired. Restaurant equipment could only be exchanged for restaurant equipment and silver bullion could only be exchanged for silver coins or bullion. Livestock must be exchanged for the same type of livestock.
Items that cannot be exchanged under Section 1031 are goodwill or growing concern value of a business. Additionally, inventory or other property held primarily for sale cannot be exchanged.
The ability to defer gain by completing an exchange of personal property opens up an endless number of investment opportunities. Too often, many hold on to their unwanted properties or sell and pay the capital gains because the do not know they can take advantage of Section 1031. The impending taxes prevent taxpayers from modernizing, relocating or expanding. Even those who have completed a real property exchange are often unaware of the ability to defer gain on personal property.
Consider the farmer who is relocating. He can exchange land for land. He can exchange farm equipment for farm equipment and he can also exchange livestock for livestock. The ability to defer the gain will make the relocation a lot easier. The immediate tax avoidance gives them extra equity to reinvest in their new location, equipment and livestock. A local newspaper may wish to acquire a newer, more efficient printing press. It may exchange the old printing press for the new printing press. A restaurant owner may wish to expand to a larger location and can do two exchanges; one real estate for real estate and one for the restaurant furniture, fixtures and equipment. A truck driver may own his delivery route and wish to relocate to another area. An exchange would allow him to exchange his route for another route, even with a different distributor. Even the owner of a major league sports team can exchange a player’s contract for another. An antique car collector can exchange one car for another. These are just a few examples of how an exchange can work for the owner of personal property.
Never should a taxpayer simply sell any type of business use or investment asset, whether real or personal property, without considering the benefits of a 1031 exchange.